Under-valued Rough Diamond Imports into Dubai Trigger Filing of Suspicious Activities Reports
April 21, 05 by Chaim Even-Zohar
Any rough diamond parcel traveling in transit through Dubai finds its value “mysteriously” doubled at the exit gates. If this weren’t such a serious matter, I would joke that this certainly seems like a great way to make money… Things often aren’t what they appear to be and we were quite surprised to discover that Dubai had actually returned a number of rough diamonds parcels to their African origin countries because the Kimberley Process authority categorically refused to accept the gross under-valuation, which it found to be wholly inconsistent with the general “image” of the Dubai rough diamond trade.
Then I found out that the Chairman of the Kimberley Process, Vyacheslav Shtyrov, has recently officially been informed by the Dubai KP authorities that it has officially reported a number of cases of blatant under-valuation of rough diamonds imported into the U.A.E. – raising suspicions of possible illegal laundering or corrupt activities – to the Central Bank of the United Arab Emirates. As we are writing these lines, the Central Bank is investigating a number of diamantaires.
This is certainly a new development. Except for one case in Belgium, we don’t really know whom and where such reports are filed. In relevant legislation in most countries disclosing the fact that a Suspicious Activities Report has been made is by itself prohibited. Informing the Chairman of the Kimberley Process Scheme of such action certainly signals to the world that someone or some people in Dubai are totally “fed up” – and are putting the diamond traders on notice.
The United Arab Emirates are renowned for their growing number of free trade zones (FTZs). There are over a hundred multinational companies located in the FTZs with thousands of individual trading companies, including some 200 rough diamond trading firms. The FTZs permit 100 percent foreign ownership, no import duties, full repatriation of capital and profits, no taxation, and easily obtainable licenses. Companies located in the free trade zones are treated as being offshore or outside the U.A.E. for legal purposes.
However, last year a new law was passed which on the one hand reconfirms the status of Free Zones companies as being exempt from U.A.E. federal civil and commercial laws, but on the other hand subjects them and their operations to federal criminal laws including the Anti-Money Laundering Law No. 4/2002 and the Anti-Terror Law No. 1/2004. The latter law provided for the establishment of the Anti-Money Laundering and Suspicious Case Unit (AMLSCU), which acts as the Financial Intelligence Unit (FIU) and is housed within the Central Bank. Financial institutions under the supervision of the Central Bank are required to report suspicious transactions to the AMLSCU, which is charged with examining them and coordinating the release of information with law enforcement and judicial authorities.
The AMLSCU has the authority to request information from foreign regulatory authorities in carrying out its preliminary investigation of suspicious transaction reports. [According to U.S. Department of State data, from December 2000 to November 30, 2004, the AMLSCU in the U.A.E. received 2,259 reports of suspicious transactions; of that number, 2,148 were investigated by either the AMLSCU, the Central Bank, or law enforcement officials. In 27 cases, the Central Bank issued freeze orders and referred the cases to the Public Prosecutor; 12 of those cases are currently in the process of prosecution for money laundering, and 9 are in the process of judgment for money laundering and confiscation of proceeds.]
So now we know that these thousands of suspicious reports include at least three rough diamond traders – and maybe more. Virtually all rough diamond traders have registered companies in one of the U.A.E.’s Free Trade Zones and often the sole purpose of the trading through Dubai is the artificial “value change”, something very much underscored by the fact that the rough carats (volume) coming in equals the volume that goes out – while the value doubles. Throughout the U.A.E., the Dubai Metals and Commodities Centre (DMCC) is the sole authority to implement the Kimberley Process Certification Scheme (KPCS) – in none of the Emirates will customs release a parcel of rough without prior DMCC authorization.
The DMCC has formally raised the problem of under-valuation of incoming shipments from certain countries with the Kimberley Process System secretariat, with last year’s Kimberley Peer Review Team and with governments. In particular, according to a source familiar with the Review Team, “the value presented on certificates coming from Tanzania, Angola, the Republic of Congo, the Democratic Republic of the Congo, and, to a lesser extent, India, consistently is valued significantly below the valuation that the U.A.E. Kimberley Process authorities believed was accurate.”
Indeed, according to the Review Team report, “in the case of incoming shipments from the Republic of Congo, the [review] team noticed that rough diamonds of apparent gem quality had been mixed in parcels declared as industrial and that rough diamonds of high value carats had been mixed with low quality carats. With regards to origin, the importer suggested that the diamonds were of mixed origin having come from Angola and the Democratic Republic of Congo. The average price per carat of each parcel was $53 per carat. Observation by the [KPS’] mission members and the DMCC inspector pointed to a substantially higher value per parcel ranging from $800 to $1,000 per carat.” The DMCC has repeatedly, consistently, and with considerable persistence, raised its concerns over the under-valuation with the Secretariat of the KPS, with the individual exporters, and with the exporting countries’ authorities. All of this to little, or no, avail.
As recently as a few weeks ago (we think it was in the last week of March 2005), the Dubai KP authority informed the KPCS Chairman that “in most cases, imported shipments are always great under-valued.” What is happening, the KP authority informed Shtyrov, is that “gem quality rough diamonds were being quoted as industrial rough diamonds.” Basically, the problem faced by the Dubai authorities is the alleged illegal collusion by the African diamond exporters and officials in the governments of the very countries that issue the KP certificates to begin with. Or, in plain English, corruption among member countries of the Kimberley Process.
DMCC officials acknowledge being interested in becoming an important trading hub for African diamonds. They are torn between their desire to accommodate the licensed traders in Dubai, their commitment to stringently execute the Kimberley Process requirements, and their desire to build a long-term sustainable rough diamond business in the U.A.E.
The DMCC tries to navigate through these various conflicting courses – and negotiate some kind of accommodation. However, from talking to quite a few local players, I got the distinct impression that they are getting increasingly frustrated and angry – and, most of all, they are unhappy with the lack of guidance provided by the Secretariat of the Kimberley Process Scheme.
“We explicitly raised with the KPS Review Team about the under-valuation problem; the distinguished members of the team (also including U.S. Kimberley Process Ambassador Jay Bruns, South African Diamond Board CEO Louise Selekane, and Global Witness’ Alex Yearsley) had an opportunity to witness first hand the arrival of a grossly under-valued parcel into Dubai, and the team noted in its report that ‘this is an issue for further consideration for KPCS discussion’”, so why are we still seeking guidance and awaiting specific instructions,” noted one DMCC source. Again and again, the issue is being raised. The most recent communication to Shtyrov repeats the request: “This issue [of valuation] is becoming of concern to us, and we would appreciate your advice on the matter. According to the KPCS, please advise us on the proper procedure to address the matter.”
The fact that the Dubai KP office has now reported suspicious cases to the competent authorities and have also returned rough diamond parcels to Africa illustrates that it is not willing to jeopardize the reputation of a diamond-center in the making. It certainly changes the hitherto accepted rules of the game.
Have a nice holiday weekend.
